In my first sales job, I sold pool and spa equipment to contractors and retail pool supply stores. On the surface, it appeared that our primary business was selling heaters, filters, and pumps. As I became more familiar with the business, however, I realized that this was not the case.
It turned out that contractors shopped very carefully during the initial purchase of a big-ticket item, so we actually made most of our profits on repair parts and accessories. As the business had matured, a higher percentage of sales naturally came from replacement parts as the products sold got older. As the competition drove down margins on the commoditized hardware, we continued to make money on the small but important replacement parts. Convenience, availability, product knowledge, and free delivery all were more important to our customers than price alone.
Many industries seem to be in one business, but actually generate profits providing something else. Have you been to a movie theater recently? You’d think that $8.50 per seat would be enough for the theaters to make a profit. But ticket sales just cover the costs of showing the movie. The profits come from popcorn, soda, and candy. The movies are just a proven way to attract high traffic to the more-profitable concession business.
What about the cruise industry? Do you think they really pay for that massive seagoing city with the puny rate they charge for your room? Heck no! They know that, once there, most vacationers spend happily on excursions, alcohol, gambling and other on-board services–and that’s where they make their profits.
What about that new car you just bought? One reason that car dealers are often willing to let cars go at ridiculously low margins is that new-car sales are not their primary profit center. Car dealers make most of their profits from used cars, repairs, and service.
How about taxes? Tax preparation and auditing have been commodities for years. The big accounting firms morphed into consulting behemoths, and are now trying to figure out how to get into the financial and investment advisory business.
What is going on here?
In mature industries, profits are often not made where you would expect them to be, because what appears to be the main product is commoditized. This is already becoming the case with the financial advice industry as it matures. As the competition heats up, consumers demand more for less, yet costs keep going up. How should you respond?
Because of the current challenges in the financial service industry, many financial advisors are looking for new and better ways to increase their profits and provide better services for clients. There are two basic strategies for overcoming low margins and profits caused by commoditization.
One is to offer additional tangible products and services to your existing clients. The basic model that has evolved from the big firms is the long-talked-about “one-stop shopping.” All of the major financial services companies now provide investments, annuities, banking services (including loans), life insurance, trusts, estate planning, and alternative investments. They are really trying to capture the largest possible chunk of each client’s wallet. The downside of this strategy is that it will only take its proponents so far; after all, all of the additional services are becoming commoditized, too.
Another strategy is to provide intangible benefits to the client, where much of the perceived value is in the way the client “feels” about the product or service. A classic example of this is Mercedes-Benz. In a recent article, one of the car company’s marketing people said, “We don’t sell transportation; that’s a commodity. We sell status.” Another example is the Hard Rock Cafe. Their primary commodity is food, but what people are really paying for is entertainment. The entertainment value allows the restaurants to charge premium prices for average food and service.
Providing intangible benefits to your clients allows you to charge for your highly valued services while outsourcing the commoditized ones. Many financial advisors are experimenting with life planning, which seems to be a natural evolution of our industry. Such advisors are focusing on the purpose of money rather than on the money itself.
I suggest you take a hard look at other industries for inspiration regarding how you may reinvent your business to better serve your clients–not to mention your bottom line.